matt black's connections' blogs

Here's the Economic Calendar for the week commencing the 1st of November 2010. This week is monetary policy mayhem week! The main even will be the announcement from the US FOMC as it announces its decision on monetary policy, and more importantly its decision on quantitative easing - this will be closely watched by the world. And then there's also the Reserve Bank of Australia, European Central Bank, Bank of England, Reserve Bank of India, and of course the Bank of Japan - who rescheduled its meeting to follow the Fed's announcement. Other than the monetary policy mayhem there's the usual PMI's from China and the US, and nonfarm payrolls on Friday.

This week we review the Q3 GDP results from the UK and US, then look at the recent data on the US housing market and consumer confidence. Then we examine some of the monetary policy decisions announced over the week, before wrapping up with a look at the inflation and employment situation in Japan.

1. US GDPFirst up is US GDP which grew 0.4% q/q (or 2.0% "annualised" vs consensus 2.0%). On a year on year basis the US economy grew 3.1% vs 3.0% in Q2. Much of the gains were in inventory investment, consumer spending, equipment investment and government spending. So overall, the result was much as expected - relatively ho-hum, showing the US economy recovering - but at a subdued and muddled pace. So of course it's not plain sailing yet, a lot of the damage done during the financial crisis needs to be repaired, and a lot of the excesses need to be unwound before a true sustainable economic recovery can take place in the US.2. UK GDPover in the UK the growth rate was relatively strong at 0.8% q/q, which is a little lower than the 1.2% in Q2, but still respectable and enough to disappoint those that were hoping for another round of quantitative easing from the Bank of England. On an annual basis the British economy grew 2.8%, up from 1.7% in Q2. But as with the US, the all clear can't be signaled yet, and it is too soon to rule out further monetary policy stimulus - especially as the UK government seeks to reign in its budget deficit (maybe a bit of contracting on the fiscal and expanding on the monetary). So all the more reason to watch what happens next week!3. US Consumer Confidence and HousingAlso out in the past week was the much watched Case Shiller House price report for August, which came in weaker on a monthly basis and slowed its increase on a yearly basis. So a disappointing result, but not a surprising result - there's no fundamental basis to expect a strong upsurge in the US housing market (and relatively small basis for sideways movement in prices). So of course it's also unsurprising to see still subdued results in the consumer confidence numbers, albeit with a small increase to 50.2 from 48.5 in September. At the margin the result was positive in that much of the increase was driven by an increase in the future expectations index, which is sensible.4. Monetary PolicyIn monetary policy there were no major events this week, the main items of interest were Denmark, and Sweden both increasing interest rates slightly - but signaling a slow move. The other interesting part was Japan, which expanded the scope of its asset purchase program and brought forward the next meeting date (to just after the Fed's meeting next week). On that note, the next week will be a very interesting week monetary policy-wise as the US FOMC, Bank of Japan, Bank of England, RBA, and ECB are all set to announce policy decisions. The main point of attention will be what the US Fed does in terms of QEII - will it go for a shock and awe campaign, or will it go for an incrementalist approach? Either way it almost seems a certainty now that the second quantitative easing campaign is about to commence.5. Japan Inflation and UnemploymentIn Japan, deflation remained persistent with the CPI falling -1.1% vs -1.0% in August, but the jobless rate slipped slightly to 5.0% vs 5.1% in August on the back of increasing payrolls. As pointed out, the Bank of Japan expanded the scope of its asset purchase program to include lower graded corporate bonds in effort to try and stimulate the economy and try and inject a semblance of inflation. Most remarkably though was the move to hold another meeting next week just after the Fed, which signals that the BOJ is ready to act if the US makes moves to devalue the US dollar. This would not be surprising as the Japanese economy is traditionally an export led economy, and with recent trade results faltering somewhat it may make for an interesting week indeed.Summary

So we saw the US with relatively subdued growth in Q3, but growth nonetheless. But without showing major signs of strength has all but pave the way for a second campaign of quantitative easing by the US. Meanwhile the UK grew a little faster, and perhaps even blew the case for an extension of the asset purchase program by the Bank of England. We also saw a weakening US housing market and a US consumer stuck in limbo. On the monetary policy front most held, a couple increased, but the real monetary policy action will come next week. In Japan deflation remained, jobless declined slightly, and the BoJ lined itself up to counter any possible dollar devaluing determinations from the Fed next week.

Here's the Economic Calendar for the week commencing the 25th of October 2010. This week the main event is the US Q3 GDP report on Friday, the UK will also release its Q3 GDP data this week. In monetary policy New Zealand and Japan are both due to announce interest rate decisions this week. Japan also has a swath of key monthly data out such as employment, inflation, industrial production, and trade data. The US will also see its much Case-Shiller house price report, and consumer confidence numbers released this week.

This week the focus is on China, with the quarterly statistics out this week - as well as a surprise interest rate increase from the PBOC. Among the data we review in this edition is GDP growth, inflation trends, the interest rate decision, retail sales growth, and the continued rise of new lending.

1. China GDPFirst up is GDP, China saw growth decelerate slightly to 9.6% year on year in the September quarter (or 10.6% YTD on YTD), down slightly vs the 10.3% growth rate in the June quarter. Some of the deceleration was due to a higher base comparison period, but also impacts from macroeconomic controls put in place by the government. So basically the Chinese economy is still tracking along at a relatively fast pace.2. China Inflation OutlookOf course the inflation outlook should also remain elevated. The September inflation figure was 3.6% vs 3.5% in August, and 2.9% in June. The PBOC Future Price Expectations Index was also recently released; rising to 73.2 from 70.3 as inflation expectations remain elevated. Much of the inflation result was driven by food prices. Overall the inflation outlook for China remains high, a simple convergence in the chart below should say that one or the other has to give soon (i.e. either higher inflation or lower expectations), but the fundamentals line up with rising inflation.3. China Monetary PolicySo it's not a major surprise then that the PBOC raised interest rates, especially in the back drop of a series of increases in the Required Reserve Ratios for the banks. The People's Bank of China increased the main policy rate 25bps to 5.56% from 5.31%, as well as increasing the 1-year benchmark deposit rate 25bps to 2.50% from 2.25%, marking the first increase since 2007. The move is a logical response to the rapid growth in lending (more on that later), concerns about asset bubbles and overheating, as well as the usual monetary policy reason of higher inflation.4. Retail SalesThe consumer spending data shows no tapering off either, with continued strong growth - a positive sign for an economy that is facing the challenge of rebalancing to a domestic demand vs export driven growth. The fastest growing categories were 'Gold and Silver Jewelry' (54.9%), 'Furniture' (39.6%), and 'Building and Decoration Materials' (39%), while the largest categories were 'Automobile' (CNY 148 bn), 'Petroleum and Related Products' (CNY 93.7bn), and 'Grain, Oil, Foodstuff, Beverages, Tobacco, and Liquor' (CNY 70.2 bn). So what does that tell us? Chinese consumers are spending most of their money on cars and driving, and spending on discretionary wealth or status items is rising fast. Which is not overly surprising given the per capita rise in income of 9.7% (driven by an 18.7% increase in income from wages and salaries).5. New lendingThe value of new loans is consistently rising in China, attracting the attention and action from the central bank. And wisely so, as the rapid pace of growth in loans threatens to blow out inflation, and potentially create overheating and asset bubble issues. But cultural and regulatory factors have dictated a relatively lower use of debt (as compared to e.g. the US). So lending growth may well be key factor in rebalancing China's economy - the key is getting it done sustainably, and avoiding the excesses demonstrated by the US experience.Summary

So the Chinese economy is still going strong, judging by the data that was released this week. This is heartening given the slowing that we're seeing in several other key economies e.g. US, Japan... but at the same time the divergence in economic prospects has created tensions.

For China the outlook appears to be for continued strong growth, rising inflation; and accordingly tighter monetary policy conditions (which is good for the sustainability of the economic growth). There are promising signs on the rebalancing process in the consumer spending data (though more needs to be done), but also interesting signs around wealth and income levels.

The key risks for China's economy remain; inflation and overheating, potential impact from the global economic slowdown, the challenges in reorientating the economy to a domestic demand led strategy from an export led strategy, and policy risk (i.e. tightening too much too fast). Apart from that expect more of the same.

Here's the Economic Calendar for the week commencing the 17th of October 2010. This week China takes the stage with its monthly main economic indicators release; of course as it is also a quarter end there will be GDP data as well. Elsewhere the Bank of Canada will announce its interest rate decision on Tuesday, and the RBA and BoE will release monetary policy meeting minutes and the Fed will release its Beige Book. Also on the radar is the G-20 Summit of Finance Ministers and Central Bank Governors on Thursday.

This week we look at the recent trade data out of the US and China, then we look at developments in the US inflation situation and what implications it may have. We also review the inflation situation in the EU before reviewing the US consumer sentiment numbers.

1. China Trade DataFirst up is the September trade data from China, imports hit a record high at $128.1 billion (24.1% y/y), and exports of $144.9 billion (25.1% y/y) leaving a trade surplus of $16.9 billion. The September quarter also saw trade rising on a quarterly basis with both exports, imports, and the trade surplus rising vs the June quarter; also both exports and imports hit a quarterly record high. The rise in imports is perhaps one of the most interesting aspects in terms of China's role in the global economy. But of course the part getting much of the attention is the trade surplus...2. US Trade DataThe other big trade data out this week was from the US; the August trade deficit ballooned out to -$46.3 billion, above consensus -$44.3 billion, and July's -$42.8 billion. This time the drivers of the expansion in the deficit were not just from petroleum goods, the nonpetroleum deficit grew to $35.9 billion from $33.2 billion - signaling a cyclical normalisation of the the US trade deficit. The point is that the US trade balance started to head towards zero because of cyclical factors, but it will need to be driven by structural factors if the US is ever going to see a positive trade balance.3. US Inflation SituationAlso from the US this week was inflation data, which showed a considerably subdued inflation situation in the US. Month on month headline CPI rose 0.1%, and was unchanged on a core basis. Year on year the headline rate reduced from 1.2% to 1.1%, and the core rate fell to 0.8% from 1.0%. However looking at the chart below the ISM prices sub-indexes from both the PMI and NMI show a relatively mixed story - it says that businesses are reporting paying higher prices, which means either an eventual pick up in inflation or margin compression.4. Euro Zone Inflation SituationIn Europe inflation increased in August, with the headline rate rising to 1.8% from 1.6% in July, but core staying flat at 1%. The main drivers were transport, alcohol & tobacco, and housing. Of course the usual extremes were seen with Ireland facing deflation of -1.0%, followed by Latvia with a 0.3% annual rate; while at the other end were Greece with 5.7% and Romania at 7.7%. Thus at least on a headline basis inflation is by no means gone in the EU, but the message of a fragile, gradual, and uneven recovery for the EU remains5. Reuters/University of Michigan Consumer SentimentFinally, the US Consumer Sentiment index slipped slightly to 67.9 from 68.2 in August, and below consensus 69. The future expectations index fell to 60.9 form 62.9 previous, and the current conditions index rose to 79.6 from 78.3 previously; showing that consumers are slightly happier about things now and slightly less optimistic about the future. Much of the uncertainty is driven by delays on decisions around tax cuts, but also the general uncertainty that accompanies such recovery as the one we're seeing... and of course all the talk about QE2 (which is really an implicit admission by the fed that things are not looking good) will hardly help.Summary

So we saw China producing record trade results in the September quarter, with the trade balance rising and also raising eyebrows, but of course the continued rise in imports is one of the most interesting features. On the other side of the coin, the US is seeing a cyclical reversal of the ground it made in reducing its trade deficit - the message is that the US will continue to see trade deficits until structural forces drive change.

On the inflation front the US September results showed an exceedingly subdued trend in inflation, but the price indexes in the PMI indexes suggested that the string of disinflation could be temporary (but much will depend on the course of the recovery). Over in the EU the inflation picture was a bit different, with headline rates moving up (but core remaining flat) as the fragile, gradual, and uneven recovery unfolds.

Back to the US, the consumer sentiment figures showed a mixed situation for consumers as uncertainty related to the strength or otherwise of the economic recovery weighs in (in spite of a relatively healthy retail sales figure). So it will be interesting to see if the Fed effectively throws in the towel with another round of quantitative easing. Watch this space!

China's trade rebound continued in September as global demand normalised as businesses churn through inventory and consumer spending slowly edges up (but well below trend). The September quarter saw trade rising on a quarterly basis with all exports, imports and the trade surplus rising vs the June quarter; with both exports and imports hitting a record high quarterly result in September. Thus marks China's return to pre-crisis levels, but with global demand potentially slowing - led by the subdued recoveries in Japan and the US - China will increasingly need to look internally to drive economic growth (short of further expanding market share of exports, and selling higher margin goods).

Of course the highlight of the September result, or perhaps more - the standout - is the recovery in the trade surplus. The trade surplus is still relatively low historically on both a quarterly, monthly, and rolling annual basis - but is certainly trending upwards. It would still take a significant mentality shift or significant global structural economic changes for the Chinese trade surplus to turn significantly negative. But a negative trade balance should actually be an objective in China's 5-year plan. Such a shift would be the most sustainable for China - perhaps it would also mean that the environmental sacrifice that China has made in the name of economic progress could be reversed or slowed. But in any case the economic and environmental sustainability of the Chinese miracle is a game of huge stakes that the Chinese leadership will need to play carefully and resolutely.

The strategic implications or themes from the trade results include:1. A continued rise in demand for imports (lead by inputs for production), providing opportunities for trading partners at the country and firm level - which will lead to flow on benefits to those economies and financial results respectively.2. A continued rise in the trade surplus, which will weigh in on global politics and rhetoric around the so-called currency wars (providing ammo for critics, and raising further the China trade surplus scape-goat flag for US politicians).3. A strong recovery in volumes for Chinese exporters, which will lift profits for those companies - and potentially lead to eventual wage rises; thus lifting average wages and potentially stimulating domestic demand (and price pressures).4. The broader threats and opportunities for China and its trading partners at a country and geopolitical strategy level (in terms which direction the leadership of China will focus policy e.g. at an economic level; trade driven or domestic demand driven).5. The imperative for boosting domestic demand; and the ultimate inevitability of it. This will provide opportunities for those who serve the Chinese consumer, whether they do so from within China (probably the greatest opportunity), or from elsewhere.

This week we look at some of the monetary policy decisions during the past week (Australia, Indonesia, Japan, Europe, UK, Philippines). Then we review some interesting data points from the US; non-manufacturing PMI, consumer credit, and the nonfarm payrolls report. Then we finish up with a look at the strong employment numbers in Australia.

1. Monetary Policy ReviewAmong the central banks announcing monetary policy decisions last week, the Reserve Bank of Australia held its rate at 4.50%, the Central bank of Indonesia held at 6.50%, the Bank of Japan decreased from 0.10% to between 0 and 0.10%, Bangko Sentral Ng Pilipinas held at 4.00%, the European Central Bank held at 1.00%, and the Bank of England held at 0.50%. So all quiet really except for japan who also announced a 5 trillion yen quantitative easing program where it would buy bonds, REITs, and even shares in an attempt to ease further and stimulate the economy. The close call was Australia, which is likely to raise at their next meeting as the Australian economy goes from strength to strength (more on this later).

2. US Non-manufacturing PMIThe US non-manufacturing index rebounded in September on the back of a surge in new export orders. The index rose to 53.2 from 51.5 in August, and up against consensus estimates for 52.0. The other standouts in the report were inventories (falling from 53.5 to 47), supplier deliveries (improving to 55.0 from 51.0), employment (improving to 50.2 from 48.2). Overall the non-manufacturing PMI report showed relatively broad strength (especially as compared to the manufacturing PMI report released last week). Thus the result is relatively positive in the scheme of things.3. US Consumer CreditUS Consumer Credit continued to contract in August as the deleveraging cycle continues to run its course. In total consumer credit contracted by $3.3 billion in August, vs -$3.6 billion in July, and slightly below an expected contraction of -$4.0 billion. Breaking it down to revolving vs non-revolving, non-revolving is experiencing continued positive numbers due largely to car loans. But overall it reflects the trend of consumer deleveraging, and fits with the data we're seeing in terms of savings rates and retail sales. So basically it's the same old story of the long hard recovery.4. US Nonfarm PayrollsSo it should be no surprise that we're still seeing subdued results in the non-farm payrolls data. in September payrolls fell by -95k vs consensus for -8k and previous -54k, but stripping out the government cuts and census worker cycle; private payrolls expanded by 64k, which was slightly down against August 67k and consensus 85k. Average earnings were flat against August, and the average work week was also flat. So really just another subdued result as the subdued economic recovery continues to unfold. But of course the positive numbers in the private payrolls can't be ignored, it says that there is at least a pulse - albeit a weak one.5. Australian EmploymentLooking at Australia, the jobs story is a much different one with jobs expanding again, the Australian economy added 49.5k jobs on a seasonally adjusted basis, with all of the strength again coming from full-time jobs, with part time jobs actually contracting as part-timers converted to full-timers and new employees entered the market. The unemployment rate remained at 5.1%. So again the lucky country rides strong as it continues to expand its resource sector and reaps the residual benefits of the stimulus spending last year. With continued strength in the employment data its almost a given (unless anything external happens) that the RBA will need to start lifting rates again in November.Summary

So we saw continued inaction by the central banks around the world this week as the various monetary policy decisions were announced. Much of the inaction is simply due to a relative comfort of the risks of greater inflation vs the risk of slowing or halting the economic recovery. But in some cases perhaps the more probable or helpful move would even be continued expansion e.g. in the UK, and as Japan acted in its apparently desperate moves. One thing is sure - it will pay to closely watch the central bankers around the world as the recovery unfolds.

Over to the US, we saw signs of strength in the non-manufacturing sectors, just as last week we saw rather ominous signs from the manufacturing sector - which is consistent with a confuse and muddling recovery. We also saw no surprises in the direction of the results in the consumer credit data as deleveraging plays through and in employment as the recovery remains subdued. But in Australia the employment situation is coming along strong - just as the economy is there. So in terms of what I've previously said - nothing much has changed and things are evolving much as expected.

Here's the Economic Calendar for the week commencing the 4th of October 2010. This week the main events are in the monetary policy and employment space. Firs up there's Japan with its monthly monetary policy meeting, then the RBA in Australia is expected to re-commence tightening, then the ECB and Bank of England meet on Thursday. On the employment front there's data from Australia, Canada, and the US with the much watched non-farm payrolls report. Also this week, the IMF will release its World Economic Outlook forecasts and commentary on Wednesday, shortly before the IMF annual meetings kick off in the coming weekend.

This week we review the apparent rebound in the Chinese manufacturing sector, followed by a look at the quarterly Tankan survey results from Japan. Then we look at the US PMI results which show grim signs; as do the housing and confidence figures. Finally we wrap up with a look at some other statistics from Japan in this top 3 economies of the world version of the top 5 graphs of the week.

1. China PMI: Continued ReboundChina saw a continued rebound in its manufacturing sector, as indicated by the PMI results which had the official index rising to 53.8 from 51.7 in August, and the HSBC index also rising from 51.9 to 52.9. The rebound in the main index is a promising sign, indeed the new orders index rose to 56.3 from 53.1 while the export-order index rose only to 52.8 from 52.2. Also of note in the data was the rise in the input price index component, which rose to 65.3 from 60.5. Seasonal factors aside (it is supposed to be seasonally adjusted), i.e. filling orders for Christmas, the results show an end to the drop in the index, and possibly a new revival as the Chinese economy continues to expand and personal incomes rise.2. Japan Tankan: Gradual RecoveryAnother positive, but somewhat less so, was the Tankan September quarter survey results from Japan. The overall index improved to -10 from -15 in the 2nd quarter this year. Into the detail, the standout was medium-sized manufacturers, who saw a 10 point rise from -6 to positive 4, similarly, large manufacturers solidified their recovery, adding 7 points to positive 8. So in that negatives were getting less negative, and prospects were improving for the 3rd quarter, it was a good result. However the December 2010 forecast figures were much less optimistic, with most firms expecting a reasonably deterioration in conditions. So the story is basically, small improvement, outlook not great.3. US PMI: Grim SignsThe US also released its PMI results this week, showing what appears to be a continued turn in prospects. If you recall, there was a time when people were asking "what will happen when the inventory cycle and stimulus runs out?" and here's your answer, not a whole lot really for the US. The PMI index fell from 56.3 to 54.4 with the only real strength coming from an increase in the prices sub-index from 61.5 to 70.5, a significant increase - stagflation anyone? All the other indexes that you usually want to see rise didn't, so not a great result from the US.4. US Housing and ConfidenceStaying with the US, and thinking about gloomy economic prospects, there's the US housing market and consumer confidence data details that came out this week. The US housing market continued to flat-line (no surprises there), and will likely do so for an extended period. Meanwhile the US consumer also basically flat-lined, if not deteriorated a little. The Conference Board Consumer Confidence index came out much worse than expected at 48.5 vs 53.5 in August, the present situation index decreased to 23.1 from 24.9 and the expectations index fell to 65.4 from 72 in August. So overall, while it's still not panic time, things are just not good, and they will continue to muddle along because of the damage caused by the excesses everyone got into that caused the financial crisis.5. Japan Inflation and UnemploymentBack to Japan, there was some slight improvements in the inflation and employment situation with the unemployment rate dipping to 5.1% from 5.2%, and the deflation rate improving slightly to -1.0% from -1.1% in July. So onward with the gradual export driven recovery in Japan - "Yentervention" or not. So it seems that some progress might be getting through from the Bank of Japan in its desperate struggle to stem deflation and stimulate the economy, but there are still serious challenges for the Japanese economy, at least it has China as its neighbor and trade partner, otherwise, muddle along too.Summary

This week we looked at the 3 largest economies as they release indicators on the prospects of their manufacturing and business sectors. China showed pretty good results all round, Japan showed slight improvement, and the US did not impress with its PMI results. The story of continued economic growth (catch up) and expansion in China remains intact, and the story of a long hard slog in the US and Japan also remains intact.

Japan and the US are the real spots to watch as the global recovery unfolds, though emerging markets are coming up fast and strong, it is these two pillars of stability that will drive or fail to drive much of the growth in the near term. Unfortunately things are still subdued in the US as it goes through the muddle ages of the recovery, and even Japan is showing potential warning signs of a double-dip.